If matters cannot be resolved, the resulting dilapidations claims can involve significant sums, particularly where substantial repair or reinstatement work is required. If matters reach court, legal costs add to the bill for both parties. Understanding repair obligations when entering into or taking assignment of a lease, and considering them throughout the term, can therefore help both commercial landlords and tenants manage the position and potentially avoid a dispute.
The starting point for any dilapidations claim is the lease, and all leases are different, so the precise wording matters. Parties to a lease should also look out for documents incorporated by reference or supplemental to the lease, such as licences for alterations or a schedules of condition.
A Fully Repairing Lease
Property professionals often refer to a lease as being ‘fully repairing’. But what does this mean in reality? Typically, a lease that is fully repairing will contain a covenant which requires the tenant to ‘keep’ the premises in good/substantial repair and condition.
Whilst ‘keep’ seems innocuous on the face of it, established case law means that ‘keep’, where it relates to repair obligations in a lease, means to ‘put and keep’. For a tenant, that can be an onerous requirement, particularly if the property is in a poor state of repair when the tenant takes it on.
The legal test for the standard of repair in a lease is set out in a very old case, but one that still stands. Proudfoot v Hart (1890) found that a property ‘need not be put into perfect repair. It needs only be put in such a state of repair as renders it reasonably fit for the occupation of a reasonably minded tenant of a class who would be likely to take it’.
This type of standard wording is often softened to be more appealing to tenants however, for example, a landlord may limit a tenant’s liability for the state of repair to that documented by a Schedule of Condition made at the time, exclude certain aspects of a property, or allow for ‘reasonable wear and tear’ during the term.
What is a Schedule of Dilapidations?
As set out above, dilapidations disputes commonly arise at the end of a lease. Typically, when a tenant gives their landlord notice that they are not seeking to renew their lease, or serves a break notice, a landlord will instruct a specialist building surveyor to inspect the property and prepare and serve a schedule of dilapidations on the tenant. This is a document setting out the breaches the landlord considers the tenant has committed and the work required to remedy them. If a schedule of dilapidations is produced during the lease term before the tenant leaves, it is known as an interim schedule, and if it is produced after, it is known as a terminal schedule, and sets out the cost of the required repairs to be repaid to the landlord. Where an interim schedule is served, a tenant will usually have the opportunity to undertake the repair works themselves before they hand the property back to the landlord.
For terminal dilapidations claims in England and Wales, the Dilapidations Protocol provides a procedure that landlords and tenants are generally expected to follow before court proceedings are started. It states that a landlord’s schedule should be sent within a reasonable period, normally within 56 days after the tenancy ends.
Carrying out the works during the term
Once a lease is approaching expiry, regardless of whether a schedule of dilapidations has been served, tenants should review their repairing and reinstatement obligations carefully to see what works are likely to be required. If a property has been well looked after during the term, the works may be minimal. If not, it can be cost effective to carry out works prior to the end of the lease to minimise a later claim for the cost of repairs. It is also advisable for tenants to contact and work with their landlords where possible, as the landlord may have plans for the property which will render any repair works useless (known as supersession).
Legal and surveying advice can be valuable at this stage, particularly for any party which may be unsure of the extent of their obligations under the lease.
Landlord’s claim for the cost of the works post-term
If a tenant has vacated a property leaving works to be done, and a Terminal Schedule of Dilapidations has been served, the issue turns into one of money – a dilapidations claim issued at court is essentially a claim for damages. However a landlord’s dilapidations claim is not necessarily equal to the total cost of all the works listed in a schedule.
The Dilapidations Protocol states that a landlord’s quantified demand should reflect its likely loss, which may not be the same as the cost of carrying out the remedial works. As stated above, it should also exclude works that would be superseded by the landlord’s overarching plans for the property.
There are also statutory limits on damages for breaches of repairing obligations. Section 18 of the Landlord and Tenant Act 1927 sets out that damages for breaches of repair covenants cannot exceed the reduction in the value of the landlord’s interest in the property caused by the disrepair. This is known as ‘diminution in value’ and is calculated by taking a valuation of the property as it currently is, and a hypothetical valuation based on the property being in full repair; and calculating the difference between the two. In broad terms, the principle is that a landlord should not receive compensation greater than the loss it has actually suffered.
The legislation can also prevent recovery for repairs where the property is going to be demolished or altered in a way that would make those repairs worthless.
This can make the landlord’s intentions for the property particularly important when assessing a dilapidations claim.
What happens if the landlord and tenant disagree?
With good communication, dilapidations claims can be – and often are – negotiated between the parties, with assistance from surveyors and solicitors as required.
A tenant may challenge particular items in the Schedule of Dilapidations, the scope of the proposed work, or the amount being claimed. The parties may also need to consider evidence about the landlord’s actual plans for the property.
The Dilapidations Protocol encourages early exchange of information and negotiation so that disputes can, where possible, be resolved without court proceedings.
Where agreement cannot be reached, other forms of dispute resolution may be considered before litigation becomes necessary.
When to consider dilapidations
Ideally, dilapidations should be considered at all stages in a lease, including when negotiating the terms.
Tenants should fully understand their requirements throughout the lease term, and not let required repairs built up to a level where they will be more difficult to remedy toward the end of the lease.
Landlords should undertake regular inspections of the property where the lease allows, and consider serving an interim schedule of dilapidations if the property appears to be falling into disrepair. They should also consider their longer term plans for the property and determine what steps should be taken to protect their position in that regard.
Early advice can provide more options and make it easier to manage the commercial and financial impact of the claim.
Advice on commercial property dilapidations
Dilapidations disputes can involve detailed questions about lease interpretation, repairing obligations, reinstatement requirements and the landlord’s actual financial loss.
DTM Legal’s Property Litigation team advises commercial landlords and tenants on dilapidations claims, working alongside specialist surveyors where appropriate to help clients assess liability, negotiate claims and resolve disputes.
If you are approaching the end of a commercial lease or are involved in a dilapidations dispute, contact DTM Legal’s Property Litigation team to discuss your position and the options available.